Right now, most of us — at least those of us with cars — pay for our car insurance in big lump sums, just a few times a year. And how much we pay for our coverage has very little to do with how much we drive.
Sure, many insurance companies offer lower rates for low-mileage drivers. But the discounts are piddling. According to this article, for example, if you drive 5,000 miles a year or less, you might be able to cut your premiums by a paltry 10 percent — that is, you drive one third as much as a typical policyholder, but still pay 90 percent of the insurance premiums. People who drive a lot pay less than they should, while people who drive only a little subsidize the policies of high-mileage drivers.
As my daughter would say, “No fair.”
If gasoline were sold the same way, with low-mileage drivers paying two to three times more per gallon than high-mileage drivers, the uproar would be deafening. But because insurance pricing is both convoluted and nowhere near as public as gas pricing, we let the inequity slip by, noticed only by policy wonks.
Luckily, there’s a relatively easy fix for this mess: convincing (or perhaps requiring) insurance companies to offer deeper discounts for low-mileage drivers.
The fairest system would let people pay for car insurance the same way we already pay for gas: frequently, as driving miles accrue, rather than in lump sums; and with premiums tied directly to how much people drive.
That sort of insurance system — commonly called “pay as you drive” insurance, or “PAYD” to policy wonks — would yield the biggest savings for people who drive the least. In fact, though, everyone would benefit, in at least 2 ways: by reducing how much people drive, PAYD would both reduce petroleum imports and make driving safer for everyone — high mileage drivers included.
There’s a lot written about PAYD already, but at risk of boring people, let’s recap. By converting car insurance from a fixed cost to a variable, per-mile cost, people would find that they can save more money by driving less. And in theory at least, drivers would respond to the new incentive structure by reducing how much they drive.
The question is, how much would people really cut back on driving if insurance were sold by the mile? The answer: it depends. Way back when gas seemed cheap, people spent more on car insurance than gasoline — so PAYD would have had roughly the same effect on marginal driving costs as a doubling of gas prices. Analysts believed (see, e.g., this PDF) that PAYD could reduce driving by as much as 10 percent; and with less traffic on the roads, accident rates might decline by as much as 17 percent. (That’s a huge safety bonus, by the way. Huge. In Washington State, car crashes cost a whopping $6 billion per year, according to state highway officials. A 17 percent reduction in crash costs would yield an annual economic bonus of about $1 billion each year, in Washington alone.)
But the rise in gas prices means that we now spend substantially more on gasoline than insurance. So the effect of PAYD is now far less than it once was. Still, having played around with the figures some, it looks to me as though, given current gas prices, a comprehensive system of PAYD insurance would still reduce driving (and, hence, fuel consumption) by, oh, 5 or 6 percent.
That’s if things go well — that is, if technological and social obstacles prove surmountable, and everyone signs up for PAYD. Obviously, some high-mileage drivers — the ones who benefit most from the current system — won’t want to switch. But PAYD insurers would pick up many of low-risk drivers, forcing up the cost of standard, all-you-can-drive policies, which in turn could gradually increase the incentives for choosing homes in places where driving is less necessary.
Even if PAYD only attracted low-mileage drivers, it would still reduce total driving by a percent or two, all while a) saving PAYD policyholders some money, b) reducing fossil-fuel imports, keeping more money in the local economy, and c) making the roads a little safer.
Overall, the interesting thing to me about PAYD is that it’s such a subtle change. Sure, there are complications involved in verifying policyholders’ mileage, marketing a new kind of insurance product, etc. But fundamentally it would be a minor adjustment in most people’s lives — there are no new taxes involved, and a purely voluntary PAYD system would have little or no government involvement of any sort. But simply by changing the way we pay for insurance, we’d change the way we think about driving — something that green-minded proselytizing hasn’t made much headway on.